Is your business ready for export growth? If a huge order that could transform your business comes in, do you have the necessary working capital for large-scale export? Here’s some advice on how to find and manage finance to meet export demand.
If you’re a small to medium-size enterprise with innovative products and services, you could win an export order that radically impacts your business growth. The unpredictability of export growth contrasts with the more reliable incremental growth expected of domestic sales. Successfully meeting a large export order may require re-alignment of everything you do, including your financing structures and relationships.
One of your immediate challenges will be how to gain access to appropriate levels of finance. You might require new infrastructure to boost capacity, investments in research and development to improve product and processes, increased bonding or insurance facilities, or working capital funding for pre-shipment requirements. The most efficient growth path might be to develop parts of your supply chain overseas, and this might require access to capital to make foreign investments.
A key constraint to accessing increased debt finance will be the security you can offer. A common problem for rapid-growth export-driven businesses is that the value of assets does not grow as quickly as revenues, resulting in a security shortfall impacting on the level of increased debt you can access. This is particularly relevant if you are in the services sector where the main asset is intellectual property.
Working Capital
You will need to support growth in a balanced way because your choice of the most appropriate trade finance and insurance products will determine the size of the margins you make. It’s important to make the distinction between your short-term and long-term finance needs so you can align your needs with available debt finance products, provide the appropriate security (long-term assets for long-term funds) and efficiently manage the cost of funding.
For example, an overdraft may be fine to fund the short-term working capital cycle of purchasing raw materials, processing, sale of finished goods, and the payment terms you offer your buyer. But if you need new equipment, it may be more efficient to consider a lease, or changing your terms of payment to boost your working capital.
If you need additional working capital to fund export sales, a solution may be to ask your buyer to provide you with a letter of credit from their bank. In most instances, your bank could use this to provide you with additional finance.
Exports can often require lengthier payment terms than local sales, which may affect your interest costs. Terms may exceed 90 days, and don’t count on predictable payment. But the longer the payment period under your contract, the greater the risk of non-payment and, consequently, the greater the pressure on working capital.
Short-term credit insurance covers you against loss if the buyer doesn’t pay you. Banks may also consider a short-term insurance policy to be adequate security to provide additional finance against overseas receivables working capital finance. If you need this form of insurance, there are specialists such as Atradius and Coface. There are also government and non-government agencies, such as Austrade, AusIndustry, the various State Chambers of Commerce, State Regional Development bodies and the Australian Institute of Export, that can assist you to improve your understanding of financial products.
Bank Relationship to Finance Growth
If this is your first export, you should ask your bank what types of trade finance facilities are available. Most banks have specialist trade finance departments, and your relationship manager could arrange an introduction.
Having a continuous relationship with your bank will help you get support if you go through a cash flow crunch or need funds to meet a big export order. Businesses tend to go to their bank only when they’re in trouble, but this is exactly when you’re most likely to experience a negative reaction. An ongoing relationship with your bank will help them understand the risks and opportunities for your business.
There are many ways to finance growth, but a general approach would be to consider your need and match the term of your need with the security that you offer and the term of the loan.
Bond Options & Financial Assurance
Should your buyer require a contract bond for financial assurance, you may need to provide an advance payment bond or performance bond. An advance payment bond protects a buyer who advances funds to enable you to start work on a contract. If the contract terms are not met, the bond guarantees the return of the buyer’s original investment. A performance bond ensures that if you are unable to deliver goods in time or to an agreed standard, the bond may be forfeited to the buyer.
For example, the United States typically requires suppliers to post bonds of up to 100 percent of the contract value. US surety bond issuers are often unfamiliar with our exporters or financial institutions. But SMEs often don’t have the security to obtain enough capital; and the regulatory processes are complex. One solution may be EFIC’s bonding line facility. EFIC, Australia’s export credit agency, may be able to issue a bond through its US partner Liberty Mutual Surety with as little as five percent tangible security in the case of advance payment and performance bonds.
Most banks will issue bonds if you provide 100 percent cash cover, although a strong relationship with your bank may allow a lower level of security.
If you’re operating in emerging markets you may require political risk insurance. This protects you against financial losses arising from specified political events such as expropriation of assets by the host government, currency inconvertibility and transfer blockage, and war damage.
Currency Fluctuations
When trading with international markets you may be exposed to foreign exchange. It’s important to understand that currency values may change significantly from the time you agree a price to when the goods are produced. If your export is fixed in Australian dollars and our dollar appreciates, the buyer may want to go somewhere else where the currency is depreciating. Your ability to win business may be influenced by the currency in which you trade, so you should consider possible fluctuations. You may need to speak to your bank about hedging.
The currency you select may depend on the strength of your product. You may be able to insist on being paid in Australian dollars, which avoids hedging risk. On the other hand, if you’re competing against a global market or the buyer is calling the shots, they may insist on another currency, and if the exchange rate changes this could erode your margin. Currencies may be freely floated, pegged against a basket of currencies or government controlled. You may wish to avoid trading terms that you can’t get hedging against.
Funding Receivables
A big difference between selling to the Australian market and export is the level of invoice discounting. Domestic sales are well funded, usually secured against real estate assets, and receivables financing may be 100 percent. But lenders funding exports have less comfort, particularly in emerging markets that may not be well understood. Funding for overseas receivables is often significantly lower (sometimes as low as 5 percent). You may be able to borrow more with short-term credit insurance.
For longer-term needs, you could seek assistance from organisations such as Austrade or EFIC that have specially made products that could help you. EFIC’s research showed that SMEs often missed out on export opportunities due to working capital shortages. To help exporters overcome this problem, EFIC developed EFIC Headway. This product provides security to a participating bank to enable it to lend additional funds to eligible exporters, which could boost your working capital by up to 20 percent.
For investments such as infrastructure overseas, you may also need to develop banking relationships at your export destination. If your local bank doesn’t have branches there, this could be considered together with your financing needs, as it may not be easy to open bank accounts in foreign countries.
With competition from rapidly globalising supply chains and high-growth emerging economies, SMEs no longer have the luxury of being able to depend on stable domestic growth. If you don’t grab an opportunity, another company will beat you to it. Efficient financial management will give you the competitive edge to succeed in increasingly competitive export markets.
—Sunil Aranha is head of SME Business Development at EFIC. Previously, he held senior business banking roles at Citibank and Colonial, and was CEO of small to medium-sized companies involved in the retail food and cinema sectors.
Disclaimer: This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive about the topics or products or to render financial, insurance or legal advice. No reader should act on the basis of any matter contained in this article without first obtaining appropriate advice.
Export Finance Help
There are many finance and insurance products, and organisations that can help you.
Some of the organisations with specialised services and products include:
AusIndustry—www.ausindustry.gov.au
AusIndustry is the Federal Government’s agency for delivering business programs in the Department of Innovation, Industry, Science and Research. Its programs include innovation grants, tax and duty concessions, small business skills development, industry support and venture capital.
Austrade—www.austrade.gov.au
Austrade provides assistance to all exporters. Austrade’s New Exporter Development Program is designed to coach you through the exporting process while the Export Market Development Grant can give your business vital financial support.
Australian Institute of Export—www.aiex.com.au
The Australian Institute of Export is a not-for-profit private sector organisation that assists Australian exporters and export service providers by providing a range of highly focused skills development programs.
Export Finance and Insurance Corporation—www.efic.gov.au
EFIC is Australia’s export credit agency and provides finance and insurance solutions for exporters, beyond the limits of the commercial market. Its product EFIC Headway is designed for small business, and offers existing exporters up to 20 percent additional funding to that supplied by their bank.
State government departments with export assistance programs:
Business Victoria—www.business.vic.gov.au
NSW Department of State and Regional Development—www.business.nsw.gov.au
SA Department of Trade and Regional Development—www.business.sa.gov.au
Queensland Department of Tourism, Regional Development and Industry—www.business.qld.gov.au
Tasmanian Department of Economic Development—www.development.tas.gov.au
Western Australia Department of Industry and Resources—www.doir.wa.gov.au
NT Department of Business, Economic and Regional Development—www.nt.gov.au/business
ACT Business and Industry Development—www.business.act.gov.au
Short-term credit finance
Atradius—www.atradius.com/au/
Coface—www.coface.com.au
Export finance case study: Pumped for export
A Cardiff pump maker, owned and managed by a former British policeman and salesman who came to Australia to see the 1987 Rugby World Cup and stayed, is making major inroads on global export markets with its range of Australian-designed pumps.
The Sykes Group, based in the Hunter region in NSW and led by managing director Jon Collins, has become an export success story doubling sales to the United States, Southeast Asia, India and the Middle East in just four years.
When Hurricane Katrina caused New Orleans’ 17th Street Canal levee to wash away last year, the waters of Lake Pontchatrain rushed in to destroy homes, businesses and lives. Once emergency crews realised they would need to drain the city they called the American distributor for the Sykes Group to provide pumps, pipe, filtration and tanks.
The United States is one of many markets where the Sykes Group is expanding distribution for its prime pumping equipment. It has also established offices internationally in Dubai, Hong Kong, Shanghai, Indonesia, and New Zealand, and is using local distributors in other markets.
It currently has more than 140 pumps at work on the massive Doha International Airport project in Qatar, with others on major building projects in the estimated $A16.4 billion construction boom taking place in the United Arab Emirates capital Abu Dhabi.
Export Finance and Insurance Corporation (EFIC), Australia’s export credit agency, and HSBC are assisting the Sykes Group as it seeks further export growth in target markets.
The company has used additional working capital available through EFIC Headway, a financial guarantee from EFIC to a bank, to fast track the export sale of its sturdy Yakka 150i pump.
“We have developed extremely reliable pumps that were designed for tough Australian conditions and are now being exported to countries where the environment is just as harsh,” Collins says.
The Sykes Group started life as the local subsidiary of a British company that made its name with a pump capable of dealing with heavy bomb damage to water supplies and sewers at the height of the London Blitz in World War II.
With 20 years’ industry experience in Britain and the United States, Collins was asked to look at the Australian subsidiary on his 1987 World Cup visit. He stayed on as the local company’s managing director before purchasing it in a friendly management buyout in 1992.
“There were some opportunities for projects offshore back then but we had been somewhat restricted by the British parent company prior to the buyout,” Collins explains.
Fifteen years on, the Sykes Group is now bigger than its original parent and continues to grow in line with its business strategy for the Australian and international markets.
The company is a long-time client of EFIC and is now experiencing the benefits of the innovative EFIC Headway facility, which enables exporters to access extra working capital from their participating bank without the need to provide additional security.
“The Sykes Group is a great example of a profitable, fast-growing SME whose success has outstripped the value of assets that can be used to secure additional working capital,” says Sunil Aranha, EFIC’s head of SME business development.
“Our research shows that SMEs frequently miss out on export opportunities due to working capital constraints, and that 43 percent of SMEs would borrow more if finance was available. EFIC Headway is there to help exporters reach their full growth potential.”
Collins says growing its international business was a key objective for the company and having access to additional funds enabled them to take advantage of immediate export opportunities in the United States.
“The additional funds via EFIC Headway have made a significant difference to the size and effectiveness of our business,” he says. “Our turnover has increased by 12 to 15 percent. It has given us great opportunities to access new markets.”
